TITLE I
GENERAL PROVISIONS ATTRIBUTES OF A CORPORATION. [S-O-A-P]
DEFINITIONS AND CLASSIFICATIONS
SECTION 1
Title of the Code. — This Code shall be known as "The Corporation Code of
CORPORATION AS AN ARTIFICIAL PERSONALITY.
the Philippines." (a)*
SECTION 2
Corporation defined. — A corporation is an artificial being created by
operation of law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence.
(2)
Note: the above statutory definition refers only to private corporations or to
corporations organized under the Corporation Code.
OTHER JUDICIAL DEFINITIONS OF CORPORATION.
(1) An artificial intellectual being, the mere creature of the law, composed
generally of natural persons in their natural capacity, but which may also be
composed of persons in their political capacity of members of other
corporations (Bank of US vs. Deveaux)
(2) An artificial being created by law, and composed of individuals who subsist as
a body politic under a special denomination, with the capacity of perpetual
succession, and of acting, within the scope of its charter, as a natural person
(Fietsam vs. Hay)
(3) A collection of many individuals, united in one body under a special
denomination, and vested by the policy of the law with the capacity of acting
in several respects as an individual (State vs. Standard Oil Co.)
(4) A legal institution devised to confer upon the individuals of which it is
composed powers, privileges, and immunities which they would not otherwise
possess, the most important of which are continuous legal identity and
perpetual or indefinite succession under the corporate name, notwithstanding
successive changes by death or otherwise in the corporation or members of
the corporation.
NOTE: Though the terminology varies, the elements are usually the same.
CORPORATION | ATTY. BUSMENTE | DE LEON
(1) It is an Artificial being;
(2) It is created by Operation of law;
(3) It has the right of Succession; and
(4) It has only the Powers, attributes, and properties expressly
authorized by law or incident to its existence.
- It is NOT in fact and in reality a person but the law treats it as though
it were a person by process of fiction. The stockholders or members
who, as natural persons, are merged in the corporate body, compose
the corporation but they are not the corporation.
CONSEQUENCE OF THIS LEGAL CONCEPT OF A CORPORATION:
(1) Liability for acts or contracts. — The GENERAL RULE is that
obligations incurred by a corporation, acting through its authorized
agents, are its sole liabilities. Similarly, a corporation may not,
generally, be made to answer for acts or liabilities of its stockholders
(or members) or those of the legal entities to which it may be
connected and vice versa.
(a) A suit against certain stockholders of a corporation cannot
ipso facto be a suit against the unpleaded corporation itself
without violating the fundamental principle that a corporation has
a legal personality distinct and separate from its stockholders.
(b) A corporate officer is not personally and solidarily liable with the
corporation for the money claims of discharged or retrenched
employees unless he acted with evident malice or bad faith in
terminating their employment.
(c) All contracts entered into in its name by its regular appointed
officers and agents are the contracts of the corporation and
not those of the stockholders or members. A corporation
cannot be held liable for the personal indebtedness of a
stockholder even if he should be its president.
(d) For the same reason, the President and manager of a corporation
who entered into and signed a contract in his official capacity,
cannot be made liable thereunder in his individual capacity in the
absence of stipulation to that effect. Corporate officers cannot
be held personally liable for the consequences of their acts,
for as long as they are for and on behalf of the corporation,
within the scope of their authority and in good faith.
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 (e) A corporation is vested by law with a personality separate
and distinct from its stockholders, including its officers as well
as from that of any other legal entity to which it may be related.
(f) The property of the corporation is not the property of the
stockholders or members and may not be sold by the
stockholders or members without express authorization of its
board of directors or trustees.
NOTE: The separate personality of a corporation is a shield
against personal liability of its officers.
(2) Liability when EXCEPTIONAL CIRCUMSTANCES warrant. —
Personal or solidary liability may be incurred by corporate agents
acting in behalf of the corporation only when exceptional
circumstances warrant.
Thus, it may validly attach when:
1. [the director/trustee or officer] acted maliciously or in bad
faith, or with gross negligence (see Sees. 31, 65.), or
2. agreed to hold himself personally and solidarily liable
with the corporation, or
3. made, by specific provision of law, personally liable for
corporate action, or
4. it is proven that the officer has used the fiction of separate
corporate personality to defraud a third party or for
wrongful ends.
NOTE: There is no law that prohibits a corporate officer from binding
himself personally to answer for a corporate debt.
(3) Right to bring actions. — It may incur obligations and bring civil
and criminal actions (Art. 46, Civil Code.) in its own name in the
same manner as a natural person, although it may not perform certain
actions that can be done only by natural persons, such as the practice
of law or medicine.
(a) A corporation has no personality to bring an action for and in
behalf of its stockholders or members for the purpose of
recovering property which belongs to said stockholders or
members in their personal capacities.
(b) Since it is well-settled that the legality of a seizure can be
contested only by the party whose rights had been violated, the
right to object to the seizure of papers and documents of the
corporation belongs to the corporation as a separate entity and
not to its stockholders as such.
CORPORATION | ATTY. BUSMENTE | DE LEON
(c) Whatever mental anguish, wounded feelings, etc. (see Art. 2217,
Civil Code.) the stockholders and officers of a corporation may
suffer cannot be considered to be equally felt by the corporation,
for it is elementary that a corporation is a personality separate and
distinct from that of its stockholders and officers.
(d) A juridical person is not entitled to moral damages because,
not being a natural person, it cannot experience physical suffering
or such sentiments as wounded feelings, serious anxiety, mental
anguish, or moral shock. Mental suffering can be experienced
only by one having a nervous system.
However, a corporation may have a good reputation which, if
debased or besmirched resulting in social humiliation, may be a
ground for recovery of moral damages and attorney's fees.
While courts may allow the grant of MORAL DAMAGES to
corporations, there must be proof of the existence of the
factual basis of the damage and its causal relation to the
defendant's acts. This is so because moral damages through
incapable of pecuniary estimation, are in the category of an award
designed to compensate the claimant for "actual injury" suffered
and not to impose a penalty on the wrongdoer.
(e) For PURPOSES OF VENUE, the place of business of the suing
corporation is considered as its residence. The residence of
the president is not the residence of the corporation because it
has a personality separate and distinct from that of its officers and
stockhoders.
(4) Right to acquire and possess property. — It may acquire and
possess property of all kinds. (Art. 46, Civil Code.) Property
conveyed to or acquired by the corporation is in law the property
of the corporation itself as a distinct legal entity (Art. 44[3], ibid.)
and not that of the stockholders or members as such and vice-
versa.
(a) Stockholders or members are in no legal sense the owners of
corporate property (or credits) which is owned by the corporation
as a distinct person, and may not be sold by them without express
authorization from the corporation's board of directors or trustees.
(b) While a share of stock represents a proportionate interest in the
property of the corporation, it does not vest the owner thereof
(even assuming that it /he is the controlling shareholder) with any
legal right or title to any of the properties of the corporation owned
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 by the latter as a distinct juridical person. The ownership of that
property is in the corporation and not in the holders of
shares of stocks.
(c) The interest of shareholders in corporate property is purely
inchoate and, therefore, does not entitle them to intervene in
a litigation involving corporate property.
(d) The mere fact that one is president of a corporation does not
render the property he owns or possesses the property of the
corporation, since the president, as an individual, and the
corporation, are separate entities.
NOTE: The power to "pierce the veil of corporate entity"
belongs to the court and a sheriff usurps this power when he
enforces a writ of execution, not against the property of the
corporation, the judgment debtor, but against that of its president
on the ground that they are one and the same. (Cruz vs. Dalisay,
152 SCRA 482 [1987])
(e) A tax exemption granted to a corporation cannot be
extended to include the dividends paid by such corporation
to its stockholders.
(f) The agreement of co-shareholders to mutually grant the right
of first refusal to each other, by itself does not constitute a
violation of the constitutional provision limiting land
ownership to Filipinos and Filipino corporations. If the foreign
shareholders of a landholding corporation exceeds 40%, it is not
the foreign stockholders' ownership which is adversely affected
but the capacity of the corporation to own land, i.e., the
corporation becomes disqualified to own land. The corporation
and its shareholders being separate juridical entities, the right of
first refusal over shares pertains to the shareholders whereas the
capacity to own land pertains to the corporation.
(5) Acquisition by court of jurisdiction. — Where the appearance in court
of the president of a corporation was in the capacity of counsel of
another corporation and not as representative or counsel of the first
corporation, such appearance cannot be construed as a voluntary
submission of said corporation to the court's jurisdiction. The
personality of the president of a corporation is distinct from that
of the corporation itself. In the absence of summons on the
corporation, a judgment against it is void for lack of jurisdiction and
lack of due process.
CORPORATION | ATTY. BUSMENTE | DE LEON
(6) Changes in individual membership. — Likewise, as an entity distinct
from its members or stockholders, a corporation remains
unchanged and unaffected in its identity by changes in its
individual membership.
CORPORATION AS A PERSON, RESIDENT, OR CITIZEN.
(1) AS A PERSON. — Persons are divided into NATURAL and
ARTIFICIAL persons. The term "person" prima facie includes
both and, therefore, as a general rule, includes corporations but in a
figurative sense only.
(a) A corporation has been held to be included by the word "person"
in statutes concerning attachment, taxation, usury, insolvency and
bankruptcy, limitations, prior notice to bring suit, right to appeal,
allowing action of trespass, prohibiting the banking business,
conferring a cause of action for wrongful death, allowing suit
against usurpation of a public office or franchise, allowing a
petition to quiet title, and offering public lands for appropriation "by
all persons" who enter upon them.
(b) The word "person" has also been deemed to apply to a
corporation as used in statutes providing for suit because of the
wrongful exercise of a franchise by a "person," punishing "any
person" employing a minor child, and providing for a civil action
against "any person" unlawfully holding a franchise. Where the
word "person" is used in a definition of libel, corporations are
included.
(c) A corporation is a "person" within the meaning of Section 1, Article
III (Bill of Rights) of the Constitution that "no person shall be
deprived of life, liberty or property without due process of law" and
that it is entitled to the equal protection of the laws in like manner
as other persons in the same situation, provided the corporation
is "within the jurisdiction" of the State the protection of which is
demanded.
(d) Insofar as liberty is concerned, however, a private corporation
is held not to be a person within the language of the
constitutional provision; the liberty guaranteed is the liberty of
natural, not artificial, persons. Neither is it a person within the
protection of Section 17, Article III of the Constitution against self-
incrimination.
Thus, while an individual may lawfully refuse to answer
incriminating questions unless protected by an immunity statute,
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 it does not follow that a corporation, vested with special
privileges and franchises, may refuse to show its hand when
charged with an abuse of such privileges.
(e) But a corporation comes within the protection of Section 3 of
the same Article insuring the right of the people to be secured in
their persons against unreasonable seizures and searches. A
corporation is, after all, but an association of individuals under an
assumed name and with a distinct legal entity. In organizing itself
as a collective body, it waives no constitutional immunities
appropriate to such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process
of law, and is protected against unlawful discrimination.
(2) AS A RESIDENT OR NON-RESIDENT. — Since a corporation is a
person in the law, it is also to be deemed a resident or a nonresident
of a particular state or country within the meaning of a statute, if it is
within the purpose and intent of the statute, as in the case of
statutes defining the jurisdiction of the courts, or relating to venue,
taxation, etc.
(a) A corporation formed in one State may be, for certain purposes,
domiciled or a resident in another State in which it has its
offices and transacts business, notwithstanding the fiction of the
law that a corporation dwells only in the State of its creation and
cannot migrate therefrom.
(b) For taxation purposes, a foreign corporation may be either a
resident or nonresident, the former referring to a "foreign
corporation engaged in trade or business within the Philippines,"
and the latter, to a "foreign corporation not engaged in trade or
business in the Philippines and not having any office or place of
business therein."
(3) AS A CITIZEN. — "Citizenship" is the status of a citizen with its rights
and privileges and corresponding duties and obligations. The term
"citizen," as it is commonly understood, impliesmembership in a
political body and, therefore, does not ordinarily include a corporation,
unless the general purpose and import of the statute in which the term
is found seem to require it.
(a) There is, however, no absolute and inflexible rule that a
corporation cannot be deemed a citizen for certain purposes.
(Ibid.) A corporation is a citizen within the meaning of a statute
conferring rights, defining the jurisdiction of courts, or otherwise
relating to citizens/if the purpose and intent of the statute renders
CORPORATION | ATTY. BUSMENTE | DE LEON
it applicable, and for such purpose it is, as a general rule, a citizen
of the State or country by or under the laws of which it was created
and exists without regard to the citizenship of its stockholders or
members.
(b) "Most often when the term 'citizenship' is used in connection
with corporations, it is not used in the sense under Political
Law, but more in the sense of indicating the country under
whose laws the corporations were organized. In this respect,
'citizen,' as used in connection with corporations, is synonymous
with domicile or residence. In fact, our Corporation Law requires
that the principal office of the corporation must be located in the
Philippines.
However, when the term 'citizenship' is used synonymously with
residence or domicile, said use is for jurisdictional purposes only,
for a corporation is subject to the jurisdiction of the country under
whose laws it was organized.
Therefore, the citizenship of a corporation is not looked into
unless citizenship is an important factor in the determination or
the enjoyment of a privilege, exercise of a right or even the legality
of a contract entered into by the corporation.
CORPORATION AS A COLLECTION OF INDIVIDUALS.
(1) True in actual fact. — Although the doctrine that a corporation is an
artificial entity and a person in law, distinct from the members who
compose it, will always be recognized and given effect, both at law
and in equity, in cases which are within its reason and when there is
no controlling reason against it, it is clear that a corporation is in fact a
collection of individuals.
(2) Recognized for many purposes. — This conception of a corporation
as a collection of individuals owning the corporate property and doing
business through the corporation and in the corporate name has
always been recognized for many purposes as between the
stockholders or members themselves and as between them and the
corporation, in order to enforce and protect their rights.
NOTE: It is not only in cases like these that the law recognizes that a
corporation is in reality a collection of individuals and the corporate entity
a mere fiction, but the fiction also may be and often is disregarded
even for the purpose of giving effect to the acts of the stockholders
or members individually as the acts of the corporation.
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 DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY
- The doctrine that a corporation is a legal entity or a person in law,
distinct from the persons composing it or any other corporation to
which it may be related, is merely a legal fiction for purposes of
convenience and to subserve the ends of justice. This fiction,
therefore, cannot be extended to a point beyond its reason and policy.
Peculiar situations or valid grounds may exist to warrant the
disregard of its independent being and the piercing of the
corporate veil.
(1) WHEN LEGAL FICTION TO BE DISREGARDED. — Being a mere
creature of the law, a corporation may be allowed to exist solely for
lawful purposes but where the fiction of corporate entity is
(1) being used as a cloak or cover for fraud or illegality, or
(2) "to defeat public convenience, justify wrong, protect fraud, or
defend crime" , or
(3) for ends subversive of the policy and purpose behind its
creation, especially where the corporation is a closed family
corporation, on equitable considerations, this fiction will be
disregarded and the individuals composing it or two corporations will
be treated as identical.
(a) In other words, the law will not recognize separate corporate
existence with reference to the particular transaction involved.
This non-recognition is sometimes referred to as the doctrine of
piercing the veil of corporate entity or disregarding the fiction
of corporate entity.
The RATIONALE is to remove the barrier between the corporation
from the persons comprising it to thwart the fraudulent and illegal
schemes of those who use the corporate personality as a shield
for undertaking certain proscribed activities.
(b) The doctrine requires the court to see through the protective
shroud which exempts its stockholders from liabilities that
ordinarily they could be subject to, or distinguishes one
corporation from a seemingly separate one, were it not for the
existing corporate fiction.
(c) Moreover, for the corporate legal entity to be disregarded, the
wrongdoing must be clearly and convincingly established; it
cannot be presumed. The presumption is that the
stockholders or officers and the corporation are distinct
entities.
CORPORATION | ATTY. BUSMENTE | DE LEON
(d) The burden of proving otherwise is on the party seeking to have
the court pierce the veil.
(2) Effect as to liability. — In any of the cases where the
corporate identity is disregarded, the corporation will be treated merely
as an association of persons and the stockholders or members will be
considered as the corporation, that is, liability will attach personally or
directly to the officers and stockholders or, where there are two
corporations, they will be merged into one, the one being merely
regarded as the instrumentality, agency, conduit or adjunct of the
other.
(a) In other words, the transactions or acts of the real parties shall be
dealt with as though no corporation had been formed. The
corporate character, however, is not necessarily abrogated.
The corporation continues for other legitimate objectives.
Any piercing of the corporate veil has to be done with caution.
(b) And even if fraud is established, this fact alone is not
sufficient to justify the piercing of the corporate fiction where
it is not sought to hold the officers and stockholders
personally liable for corporate debt.
(3) APPLICATION OF DOCTRINE IN THREE AREAS. — The doctrine
applies only in three (3) basic areas, namely:
1) defeat of public convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or
3) alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation.
[check the instances in the book where doctrine is applied. p.29].
APPLICATION OF THE "INSTRUMENTALITY" OR "ALTER EGO" RULE.
- The question of whether a corporation is a mere instrumentality or alter
ego, a mere sheet or paper corporation, a sham or a subterfuge, is
purely one of fact.
- While there exists no definite test of general application in
determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have been
identified that will justify the application of the treatment of the
CRSC | 5
 doctrine of the piercing of the corporate veil. The case of Garrett
vs. Southern Railway Co. (173 F Supp. 915, E.D. Term. [1959].), cited
in Philippine National Bank vs. Ritratto Group, Inc. (362 SCRA 216
[2001].), involved a suit against the Southern Railway Co. Plaintiff was
employed by Lenoir W orks and alleged that he sustained injuries
while working for Lenoir. He, however, filed a suit against Southern
Railway Company on the ground that Southern had acquired the entire
capital stock of Lenoir Car Works, hence, the latter corporation but a
mere instrumentality of the former. The Tennessee Supreme Court
stated that as a general rule the stock ownership alone by one
corporation of the stock of another does not thereby render the
dominant corporation liable for the torts of the subsidiary unless the
separate existence of the subsidiary is a mere sham, or unless the
control of the subsidiary is such that it is but an instrumentality or
adjunct of the dominant corporation. Said Court then outlined the
circumstances which may be useful in the determination of
whether the subsidiary is but a mere instrumentality of the
parent-corporation: These are as follows:
(a) The parent corporation owns all or most of the capital stock of the
subsidiary.
(b) The parent and subsidiary corporations have com- mon directors
or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the
subsidiary or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or
losses of the subsidiary.
(g) The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
the parent corporation.
(h) In the papers of the parent corporation or in the statements of its
officers, the subsidiary is described as a department or division of
the parent corporation, or its business or financial responsibility is
referred to as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its
own.
(j) The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary but take their orders
from the parent-corporation.
(k) The formal legal requirements of the subsidiary are not observed.
The Tennessee Supreme Court ruled:
"In the case at bar only two of the eleven listed indicia occur, namely, the
ownership of most of the capital stock of Lenoir by Southern, and possibly
subscription to the capital stock of Lenoir... The complaint must be dismissed."
CORPORATION | ATTY. BUSMENTE | DE LEON
In Philippine National Bank, the contract questioned was one entered into
between respondent and PNB-IFL, not PNB. In their complaint, respondents
admit that petitioner PNB was a mere attorney-in-fact for the PNB-IFL with full
power and authority to, inter alia, foreclose on the properties mortgaged to
secure their loan obligations with PNB-IFL. In other words, petitioner was an
agent with limited authority and specific duties under a special power of
attorney incorporated in the real estate mortgage. It was not privy to the loan
contracts entered into by respondents and PNB-IFL.
Our Supreme Court has laid the TEST IN DETERMINING THE
APPLICABILITY OF THE DOCTRINE OF PIERCING THE CORPORATE
VEIL OR CORPORATE FICTION IF BASED ON THE "INSTRUMENTALITY"
OR "ALTER EGO" RULE. In applying this rule, the courts are concerned
with reality and not with form, with how the corporation operated and the
individual defendant's relationship to that operation. The absence of any
of the three (3) elements below prevents, under said rule, "piercing the
corporate veil"
(1) Control, not mere majority or complete stock control, but complete
dominion, not only of finances but of policy and business in respect to
the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will, or existence of its
own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, violation of a statutory or other positive duty, or
dishonest and unjust act in contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
NOTE: With respect to the second element, the fraud or wrongful or dishonest
and unjust act must be clearly and convincingly established.
CORPORATION AS A CREATION OF LAW OR BY OPERATION OF LAW.
- It is well-established that no corporation can exist without the consent
or grant of the sovereign, and that the power to create corporations is one of
the attributes of sovereignty.
(1) Special authority or grant by the State required. — A corporation is
created by law or by operation of law. This means that corporations
cannot come into existence by mere agreement of the parties as
in the case of business partnerships. They require special
authority or grant from the State.
This power is exercised by the State through the legislature,
either by a special incorporation law or charter which directly creates
CRSC | 6
 the corporation or by means of a general corporation law under which - The TEST TO BE APPLIED is whether the act of the corporation
individuals desiring to be and act as a corporation may incorporate. is in direct and immediate furtherance of its business, fairly
incidental to the express powers and reasonably necessary to
In the Philippines, the general law which governs the creation of their exercrise. If so, the corporation has the power to do it;
private corporations is BP no. 68. Private corporations owned or otherwise, not.
controlled by the government can only be created by special laws
(Constitution of the Philippines, Art. XII, Sec. 16.), often referred to as DISTINCTIONS BETWEEN A PARTNERSHIP AND A CORPORATION.
"charters." PARTNERSHIP CORPORATION
MANNER OF CREATION
mere agreement of the parties created by law or operation of law
An exception to the rule that legislative grant or authority is NUMBER OF INCORPORATORS
necessary for the creation of a corporation obtains with respect to at least 5 incorporators (except a corporation
may be organized by only 2 persons
corporations by prescription. sole)
COMMENCEMENT OF JURIDICAL PERSONALITY
(2) Compliance with conditions prescribed by law required. — from the date of the issuance of the certificate
from the moment of the execution of the
of incorporation by the SEC under its official
Corporations can only come into existence in the manner prescribed contract of partnership
seal
by law. General laws authorizing the formation of corporations are, in POWERS
effect, general offers to any persons who may bring themselves any power authorized by the partners only the powers expressly granted by law or
within their provisions; and if condition precedents are prescribed in provided it is not contrary to law, morals, good implied from those granted or incident to its
customs, public order, or public policy existence
the statute, or certain acts are required to be done, they are terms of
MANAGEMENT
the offer and must be complied with substantially before legal when the management is not agreed upon, the power to do business is vested in the
corporate existence can be acquired. every partner is an agent of the partnership board of directors or trustees
EFFECT OF MISMANAGEMENT
the suit against a member of the board of
a partner as such can sue a co-partner who
directors or trustees who mismanages must
RIGHT OF SUCCESSION OF A CORPORATION. mismanages
be in the name of the corporation
- A corporation has a capacity of continuous existence irrespective of RIGHT OF SUCCESSION
the death, withdrawal, insolvency, or incapacity of the individual no right has right
stockholders or members and regardless of the transfer of their EXTENT OF LIABILITY TO THIRD PERSONS
interest or shares of stock. Thus, it is frequently said that one of the partners (except limited partners) are liable the stockholders are liable only to the extent
personally and subsidiarily (sometimes of their investment as represented by the
attributes of a corporation aggregate is immortality or perpetual solidarily) for partnership debts to 3rd persons, shares subscribed by them
succession. But the corporation is by no means immortal. TRANSFERABILITY OF INTEREST
a partner cannot transfer so as to make the
a stockholder has the right to transfer his
(1) Under the Corporation Code, the life of the corporation is limited to the transferee a partner without the consent of all
shares without the prior consent of the other
period of time stated in the articles of incorporation not exceeding 50 the other existing partners because the
stockholders because a corporation is not
partnership is based on the principle of
years from the date of incorporation unless sooner dissolved or delectus personarum
based on this principle
unless said period is extended. TERM OF EXISTENCE
may not be formed for a term in excess of 50
may be established for any period of time
(2) Corporations created by special laws have the right of succession years extendible to not more than 50 years in
stipulated by the partners
any one instance (Sec. 11.)
for the term provided in the laws creating them. FIRM NAME
a corporation may adopt any firm name
A limited partnership is required by the law to provided it is not identical or deceptively
POWERS, ATTRIBUTES, AND PROPERTIES OF A CORPORATION. add the word "Ltd." to its name similar to any registered firm name or contrary
to existing law (Sec. 18)
- A corporation, being purely a creation of law, may exercise only such
DISSOLUTION
powers as are granted by the law of its creation. An express grant may be dissolved at any time by the will of any can only be dissolved with the consent of the
however, is not necessary. All powers which may be implied from or all of the partners state.
those expressly provided by law and those which are incidental or LAWS WHICH GOVERN
essential to the corporation's existence may also be exercised. Civil Code Corporation Code
CORPORATION | ATTY. BUSMENTE | DE LEON CRSC | 7
SIMILARITIES BETWEEN A PARTNERSHIP AND A CORPORATION.
(1) has a juridical personality separate and distinct from that of the
individuals composing it;
(2) can act only through agents;
(3) (except a corporation sole ) an organization composed of an aggregate
of individuals;
(4) distributes its profits to those who contribute capital to the business
(although an industrial partner also shares in partnership profits);
(5) can be organized only where there is a law authorizing its
organization. To organize a corporation or a partnership that could claim
juridical personality of its own and transact business as such is not a
matter of absolute right but a privilege which may be enjoyed only under
such terms as the State may deem necessary to impose.
(6) taxable, subject to income tax.
CORPORATION AS A PARTNER.
(1) General rule. — corporations cannot ordinarily enter into
partnership" with other corporations or with individuals.
The reasons are as follows:
(a) A corporation can only act through its duly authorized officers and
agents and is not bound by the acts of anyone else, while in a
partnership, each member binds the firm when acting within the scope
of the partnership business. In entering into a partnership, the
identity of the corporation is lost or merged with that of another
and the direction of its affairs is placed in other hands than those
provided by the law of its creation.
(b) The limitation is based on grounds of public policy, since in a
partnership the corporation would be bound by the acts of persons
who are not its duly appointed and authorized agents and officers,
which would be entirely inconsistent with the policy of the law.
(3) As a limited partner. — A foreign corporation can be a limited partner in a
(c) Furthermore, such an arrangement would permit the corporate
assets to be subjected to risks and liabilities not contemplated
by the stockholders at the time of making their investment.
(2) Exceptions. — The rule, however, is not absolute.
a. Though a corporation has no power to enter into a partnership, it
may, however, enter into a joint venture with another where the
nature of that venture is in line with the business authorized
by their charters, (see Sec. 36[7].) Thus, a corporation may be
represented by another person, natural or juridical, in a suit in
court, where there is nothing in the record to indicate that this
CORPORATION | ATTY. BUSMENTE | DE LEON
venture in which the former is represented by the latter as "its
managing partner" is not in line with the corporate business of
either of them. NOTE: A joint venture need not be registered with
the SEC provided it does not result in the formation of a new
corporation or partnership, and provided further that existing laws
governing joint ventures and implementing rules and regulations
are complied with.
b. Where the partnership agreement provides that the two
partners will manage the partnership so that the
management of the corporate interest is not surrendered, the
general rule will not apply.
c. Cases where the SEC has allowed corporations to enter into
partnerships with other corporations or with individuals, provided:
1) All the corporation partners must be managing partners
and consequently, the articles of partnership must
stipulate that all the partners are and shall be solidarily
liable for all the obligations of the partnership.
2) The statute or their respective charters or articles of
incorporation must expressly allow the corporations to
enter into partnership agreement and the nature of the
business venture to be undertaken by the partnership is in
line with the business authorized by law or the articles
of incorporation of the constituent corporations; and
3) Where one of the partners is a foreign corporation, it must
obtain a license to transact business in the country in
accordance with the Corporation Code (Sec. 123.) and
the Foreign Investments Act.
Philippine limited partnership in view of the following:
(a) There is no existing Philippine law expressly prohibiting a foreign
corporation from becoming a limited partner in a partnership;
(b) Just as a corporate investor has the power to make passive
investments in other corporations by purchasing stock, a corporate
investor should also be allowed to make passive investments in
a partnership as a limited partner.
(c) Accordingly, there is no risk that a corporate limited partner would be
solidarily liable with the partnership;
CRSC | 8
 (d) Jurisprudence and common commercial practice in the United States
indicate that corporations are not barred from acting as limited
partners; and
(e) Such a ruling would be consistent with the policy to encourage and
facilitate domestic and foreign investments in Philippine business
enterprises.
NOTE: The foreign corporation still has to obtain a license to do business in
the Philippines and must be authorized under its articles of incorporation to
enter into a partnership agreement. (SEC Opinion Aug. 17, 1995.) It is believed
that a license is not required where the participation of the foreign
corporation as a limited partner in a partnership is merely for investment
purposes and it shall not take part in the management and control of the
partnership as it shall not be deemed "doing business" in the Philippines.
ADVANTAGES OF A BUSINESS CORPORATION.
(1) It has a legal capacity to act and contract as a distinct unit in its own
name;
(2) It has continuity of existence because of its non-dependence on the
lives of those who compose it;
(3) Its credit is strengthened by such continuity of existence;
(4) Its management is centralized in the board of directors;
(5) Its creation, organization, management, and dissolution are
standardized as they are governed under one general incorporation law;
(6) It makes feasible gigantic financial undertakings since it enables
many individuals to invest their separate funds in the enterprise in order
to furnish large amounts of capital upon which big business depends;
(7) The shareholders have limited liability;
(8) They are not general agents of the business; and
(9) The shares of stocks can be transferred without the consent of the
other stockholders.
DISADVANTAGES OF A BUSINESS CORPORATION.
(1) The corporation is relatively complicated in formation and
management;
(2) It entails relatively high cost of formation and operations;
(3) Its credit is weakened by the limited liability of the stock- holders;
(4) There is ordinarily lack of personal element in view of the
transferability of shares;
(5) There is a greater degree of governmental control and supervision
than in any other forms of business organization;
(6) In large corporations, management and control are separated from
ownership;
CORPORATION | ATTY. BUSMENTE | DE LEON
(7) The stockholders' voting rights have become theoretical particularly
in large corporations because of the use of proxies and widespread
ownership; and
(8) The stockholders have little voice in the conduct of the business.
SECTION 3
Classes of corporations. — Corporations formed or organized under this Code
may be stock or non-stock corporations. Corporations which have capital
stock divided into shares and are authorized to distribute to the holders
of such shares dividends or allotments of the surplus profits on the basis
of the shares held are stock corporations. All other corporations are non-stock
corporations. (3a)
CLASSIFICATION OF CORPORATIONS UNDER THE CODE.
- The Corporation Code classifies private corporations into stock and non-
stock corporations, according to whether their membership is represented by
shares of stock or not.
(1) A STOCK CORPORATION is the ordinary business corporation
created and operated for the purpose of making a profit which may be
distributed in the form of dividends to stockholders on the basis of their
invested capital. The two (2) elements mentioned in Section 3 must
be present to make a private corporation fall under the definition
of a stock corporation.
(2) A NON-STOCK CORPORATIONS do not issue stock and distribute
dividends to their members; they are created not for profit but for
the public good and welfare. Of this character are most of the
charitable, religious, social, literary, scientific, civic, and political
organizations and societies. Non- stock corporations are primarily
governed by Title XI (Sees. 87- 95.) of the Code.
NOTES:
- The provisions governing stock corporations, when pertinent, are
applicable to non-stock corporations except as may be covered by
specific provisions of Title XI. (Sec. 87.)
- Generally, a corporation may be organized either as a stock or non-
stock such as educational corporations, (see Sees. 106- 108.)
- But some kinds of corporations cannot be organized except in the
form of stock corporations, like banks (Sec. 7, R.A. No. 337.) and close
corporations, (see Sec. 96.)
- A religious corporation is always non-stock, (see Sec. 109.)
CRSC | 9
OTHER CLASSIFICATIONS OF CORPORATIONS
(1) As to number of persons who compose them:
(a) Corporation aggregate or a corporation consisting of more than
one member or corporator;
Note: A corporation aggregate does not become a corporation
sole by the mere fact that its shares of stock become vested in
one person because the shares may be again transferred or sold
by the holder to others. In the meantime, however the holder and
the corporation may be treated as the same.
(b) Corporation sole or a special form of corporation usually
associated with the clergy. Under the Code, it is a religious
corporation which consists of one member or corporator only and
his successors, such as a bishop. (Sec. 110.) All other
corporations must be corporation aggregate, that is, they must be
formed by "not less than five (5)" persons.
(2) As to whether they are for religious purposes or not:
(a) Ecclesiastical corporation or one organized for religious
purposes. Under the Code, religious corporations are classified
into corporations sole and religious societies (Sec. 109, par. 2.);
or
(b) Lay corporation or one organized for a purpose other than for
religion.
(3) As to whether they are for charitable purposes or not:
(a) Eleemosynary corporation or one established for or devoted to
charitable purposes or those supported by charity; or
(b) Civil corporation or one established for business or profit, i.e.,
with a view toward realizing gains to be distributed among its
members.
(4) As to State under or by whose laws they have been created:
(a) Domestic corporation or one incorporated under the laws of the
Philippines;
(b) Foreign corporation or one formed, organized, or existing under
any laws other than those of the Philippines. It includes
multinational corporations created under the laws of another
State, (see Sec. 123.) For tax purposes, a foreign corporation is
further classified into resident or non-resident.
(5) As to their legal right to corporate existence:
(a) De jure corporation or a corporation existing in fact and in law;
or
(b) De facto corporation or a corporation existing in fact but not in
law.
CORPORATION | ATTY. BUSMENTE | DE LEON
(6) As to whether they are open to the public or not:
(a) Close corporation or one which is limited to selected persons or
members of a family (see Sees. 96-105.); or
(b) Open corporation or one which is open to any person who may
wish to become a stockholder or member thereto.
(7) As to their relation to another corporation:
(a) Parent or holding corporation or one which is so related to
another corporation that it has the power, either directly or
indirectly, to elect the majority of the directors of such other
corporation.
(b) Subsidiary corporation or one which is so related to another
corporation that the majority of its directors can be elected either
directly or indirectly by such other corporation. It is one in which
another corporation owns at least a majority of the shares and thus
has control; or
(c) Affiliated corporation or one related to another by own- ing or
being owned by common management or by a long- term lease of
its properties or other control device. An affili-ation exists between
a holding or parent company and its subsidiary, or between two
corporations owned or controlled by a third.
(8) As to whether they are for public (government) or private
purpose:
(a) Public corporations or those formed or organized for the
government of a portion of the State for the general good and
welfare; or
(b) Private corporations or those formed for some private purpose,
benefit, or end; it may be either a stock or non-stock corporation,
government-owned or controlled corporation or quasi-public
corporation.
NOTES:
The true test is the purpose of the corporation.
1. If the corporation is created by the State as its own agency or
instrumentality for political or public purpose connected with
the administration of government, then it is a public
corporation.
2. If not, it is a private corporation notwithstanding that it is
created to promote public good, interest, or convenience
although the whole, or substantially the whole interest in the
corporation, belongs to the State.
CRSC | 10
 - In the Philippines, the public corporations are the provinces, cities,
municipalities, and barangays. In addition, the Constitution
mandates the creation of autonomous regions in Muslim Mindanao
and the Cordilleras,
- Private Corporations include:
1. GOCCs or those organized by the government or of which the
government is the majority stockholder.
§ These corporations are private because they are not
established for the government of a portion of the
state.
2. Quasi-public corporations or private corporations which
have accepted from the State the grant of franchise or
contract involving the performance of public duties but which
are organized for profit. They have been denned also as
corporations private in owner ship but having an appropriate
franchise from the State to provide for a necessity or
convenience of the general public, incapable of being
furnished through the ordinary channels of private competitive
business and dependent for its exercise upon eminent domain
or some agency of the government.
§ they are private corporations that perform public
service.
§ These corporations are also known as “public utilities”
or “public service corporations”. Examples are those
organized as electric, water, telephone and
transportation companies.
(9) As to whether they are corporations in a true sense or only in a
limited sense:
(a) True corporation or one which exists by statutory authority; or
(b) Quasi-corporation or one which exists without formal legislative
grant. It is an exception to the general rule that a corporation
can exist only by authority of law.
It may be:
1) Corporation by prescription or one which has exercised
corporate powers for an indefinite period without interference
on the part of the sovereign power and which by fiction of
law is given the status of a corporation.
2) Corporation by estoppel or one which in reality is not a
corporation, either de jure or de facto, because it is so
defectively formed, but is considered a corporation in relation
to those only who, by reason of their acts or admissions, are
precluded from asserting that it is not a corporation. This
legal presumption is not good, however, as against the State
but may arise only for purposes of private litigation.
CORPORATION | ATTY. BUSMENTE | DE LEON
IMPORTANT DISTINCTIONS BETWEEN PUBLIC AND PRIVATE
CORPORATIONS.
(1) The most important distinction is with respect to governmental control.
- Public corporations, being mere instrumentalities of the State, are
subject to governmental visitation and control, whereas the charter of a private
corporation is a contract between the State and the corporation or
incorporators, which, under the provision of the Constitution prohibiting laws
impairing the obligation of contracts, renders such corporations not subject to
visitation, control, or change by the State, except in the exercise of the police
power.
(2) Another distinction is that a public corporation may be created without
the consent of the locality to be affected, whereas the consent of the
incorporators is necessary to the creation of a private corporation.
(3) The distinction is also important with respect to taxation, to the
question of liability for the torts or negligence of officers and agents, and
to various other questions.
DUAL STATUS OF PUBLIC CORPORATIONS.
A public or municipal corporation possesses two kinds of power,
1. governmental or public (municipal government)
2. proprietary or private (corporate legal individual)
NOTE:
- A public corporation engaged in the performance of governmental
or public functions {e.g., maintenance of peace and order) as
distinguished from corporate or proprietary functions (e.g., operation
of a public market), in the absence of statute, is not liable for
damages occasioned by the negligent or wrongful actions of its
officers, agents, or employees.
- The TEST for distinguishing the first kind of power from the second,
and consequently, in determining liability or nonliability for torts of its
agents, is whether the act performed is for the common good or
whether it is for the special benefit or profit of the corporate
entity.
CRSC | 11
 SECTION 4
Corporations created by special laws or charters. — Corporations created by
special laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them, supplemented by the
provisions of this Code, insofar as they are applicable.
INCORPORATION OF A PRIVATE CORPORATION BY A SPECIAL ACT.
- The enactment of special act creating a private corporation is subject
to the constitutional limitation that such corporation shall be owned or
controlled by the government.
The reason for the restriction is obvious:
(1) to prevent the granting of special privileges to one body of men
without giving all others the right to obtain them in the same conditions;
and
(2) it is partly to prevent bribery and corruption of the legislature.
NOTE: A special law creating a private corporation which is
neither owned nor controlled by the government is void for being
violative of the constitutional provision.
GOVERNING LAW
(1) A corporation created by a special law or charter is primarily governed
by such law and suppletorily, by the provisions of the Code "insofar as
they are applicable," either because they are not inconsistent with, or
are expressly made applicable by, the special law.
(2) Under the Constitution (Art. Ix, b-sec. 2[1] thereof), officers and
employees of GOCCs with original charters, i.e., created by Special
Law, are placed under the Civil Service, and thus subject to Civil
Service Law. Those incorporated under the general incorporation law,
the Corporation Code, are governed by the Labor Code.
GOVERNMENT AS A MEMBER OF A CORPORATION.
(1) Jurisdiction of SEC. — (SEC) has no jurisdiction over corporations
with original charter or created by special law. It follows that it has
no power to interpret the law creating it. However, the SEC can rule
on the status of a corporation as to whether it is a GOCC
belonging to this type. It has jurisdiction to determine this issue.
(2) Rights, Powers, or privileges. — As a member of a corporation, the
government never exercises its sovereignty; it acts merely as a corporator.
CORPORATION | ATTY. BUSMENTE | DE LEON
And the mere fact that the government happens to be a majority stockholder
of a corporation does not make it a public corporation. As a private corporation,
it has no greater rights, powers, or privileges than any other corporation
organized for the same purpose under the Corporation Code.
SECTION 5
Corporators and incorporators, stockholders and members. — Corporators are
those who compose a corporation, whether as stockholders or members.
Incorporotors are those stockholders or members mentioned in the articles of
incorporation as originally forming and com- posing the corporation and who are
signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members. (4a)
COMPONENTS OF A CORPORATION [4 CLASSES OF PERSONS]
1. Corporators
2. Incorporators
Notes:
- The principal function of the incorporator is to incorporate the
corporation and to enable it to become a body politic and corporate
under the law.
- While the status of a corporator is temporary because one may cease
to be a stockholder or member, an incorporator will forever retain his
status as such, notwithstanding that he has ceased to be a corporator.
- The articles of incorporation cannot be amended by deleting his name
or substituting it with that of another who is not an incorporator.
- Only natural persons can be incorporators (Sec. 10.)
3. Stockholders
Notes:
- Stockholders may be natural or juridical persons but only natural
persons can be incorporators. (Sec. 10.)
4. Members
CRSC | 12
THREE OTHER CLASSES.
(1) Promoters or persons who bring about or cause to bring about the
formation and organization of a corporation by bringing together the
incorporators or the persons interested in the enterprise, procuring
subscriptions or capital for the corporation and setting in motion the
machinery which leads to the incorporation of the corporation itself. They
lay the groundwork for corporate existence;
(2) Subscribers or "persons who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed." So, a subscriber
may not be a stockholder. He becomes a stockholder only from the time his
subscription is accepted by the corporation or the corporation's offer is
accepted by him. Technically, a person is not a stockholder (or member)
unless he is recorded as such in the books of the corporation, (see Sec.
62.) Note: All incorporators (supra.) are subscribers but a subscriber need
not be an incorporator;
(3) Underwriter or "a person, usually an investment banker, who
(a) has agreed, alone or with others, to buy at stated terms an entire issue
of securities or a substantial part thereof; or
(b) has guaranteed the sale of an issue by agreement to buy from the
issuing party any unsold portion at a stated price; or
(c) has agreed to use his "best efforts" to market all or part of an issue; or
(d) has offered for sale stock he has purchased from a controlling
stockholder.
AGREEMENT OR CONTRACT WITH A CORPORATION.
(1) Between corporators and corporation. — It is essential to the
existence of a private corporation that there shall be an agreement
between the corporators and the corporation creating a contractual
relation between them. There can be no such thing as a corporation
aggregate without members, and a person cannot become a member
except by his own agreement or contract.
(2) Between each member and corporation. — Some writers and some
cases say that there must be an agreement between the members
creating a contractual relation between them, but this is inaccurate.
There is ordinarily no contract between individual members in the
formation of a corporation. The contract is between each individual
member and the whole body of members in their collective capacity,
represented by the corporation, that is, between each member and the
corporation.
CORPORATION | ATTY. BUSMENTE | DE LEON
SECTION 6
Classification of shares. — The shares of stock corporations may be divided
into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or "redeemable"
shares, unless otherwise provided in this Code: Provided, further, That there
shall always be a class or series of shares which have complete voting
rights. Any or all of the shares or series of shares may have a par value or
have no par value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to issue no
par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference
in the distribution of the assets to the corporation in case of liquidation and in
the distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code;
Provided, That preferred shares of stock may be issued only with a stated par
value. The Board of Directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon filing
of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided, That shares without
par value may not be issued for a consideration less than the value of five pesos
(P5.00) per share: Provided, further, That the entire consideration received by
the corporation for its no par value shares shall be treated as capital and shall
not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided by the articles of incorporation and stated in the
CRSC | 13
 certificate of stock, each share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebted- ness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights. (5a)
POWER TO CLASSIFY SHARES.
- A "series" refers to a subdivision of a class of shares.
- The primary classification of shares is
COMMON and PREFERRED, each of which may be divided into other
classes.
WHEN CLASSIFICATION OF SHARES MAY BE MADE.
1. BY THE INCORPORATORS- The classes and number of shares
which a corporation shall issue are first determined by the
incorporators as stated in the articles of incorporation filed with the
Securities and Exchange Commission.
CORPORATION | ATTY. BUSMENTE | DE LEON
2. BY THE BOARD OF DIRECTORS AND THE STOCKHOLDERS-
After the corporation comes into existence, they may be altered by the
board of directors and the stockholders by amending the articles of
incorporation pursuant to Section 16.
- If the amendment changes or restricts the rights of any class of shares,
or authorizes preferences in any respect superior to those of
outstanding shares of any class, any stockholder shall have the right
to dissent and demand payment of the fair value of his shares.
CLASSIFICATION TO COMPLY WITH CONSTITUTIONAL OR LEGAL
REQUIREMENTS
(1) A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements (Sec. 7,
par. 4.), such as those which prescribe the minimum percentage of
capital stock ownership of Filipino citizens in corporations engaged in
any business or activity reserved for Filipino citizens (see Sec.
15[11].), or set the maximum limits for stockholdings in corporations
declared by law to be vested with public interest, (see Sec. 140, par.
2.)
(2) Corporations classify shares for reasons of expediency, primarily for
monitoring purposes. The par value or number of one class of shares
may be more than the others. The classification of common shares of
stocks into Class "A" and Class "B" shares have never been obligatory.
Note: Since the Constitution does not distinguish between common and
preferred shares, the latter kind of shares should be included in the
computation of the foreign ownership limit for domestic corporations. This
gives more room for additional foreign investments.
SHARES PRESUMED TO BE EQUAL IN ALL RESPECTS.
- This is the doctrine of equality of shares. It means that in the
absence of any provision in the articles of incorporation and in the
certificate of stock to the contrary, all stocks, regardless of their class
nomenclature, enjoy the same rights and privileges
(1) Authority of the board of directors to classify others. — The
board of directors has no authority to classify shares of stock
where the articles of incorporations are silent on the matter.
(2) Consent of stockholders to change of terms and preferences
of shares. — The articles of incorporation or the charter of a
corporation being considered as a contract between the
corporation and stockholders (see Sec. 16.), the corporation is
under obligation to observe the provisions thereof and it cannot
without the consent of the stockholders, change the terms and
preferences of classes of shares of stocks provided therein.
CRSC | 14
 (3) Right to vote of all classes of shares. — If one class of shares
has the right to vote, all other classes are presumed to have the
same voting power.
(4) Authority of board of directors to fix terms and conditions of
preferred shares. — The terms and conditions of preferred
shares of stock may be fixed by the board of directors only when
authorized in the articles of incorporation.
CAPITAL STOCK AND CAPITAL EXPLAINED.
(1) CAPITAL STOCK is the amount fixed in the articles of incorporation,
to be subscribed and paid in or agreed to be paid in by the
stockholders of a corporation, in money, property, services, or other
means at the organization of the corporation or afterwards and upon
which it is to conduct its business, such contribution being made either
directly through stock subscription or indirectly through the declaration
of stock dividends.
(a) AUTHORIZED CAPITAL STOCK refers to the amount of capital
stock as specified in the articles of incorporation. It is synonymous
with capital stock where the shares of the corporation have par
value, If the shares of stock have no par value, the corporation has
no authorized capital stock, but it has capital stock the amount of
which is not specified in the articles of incorporation as it cannot be
determined until all the shares have been issued.
(b) SUBSCRIBED CAPITAL STOCK is the amount of the capital stock
subscribed, whether fully paid or not.
(c) OUTSTANDING CAPITAL STOCK is the portion of the capital
stock which is issued and held by persons other than the
corporation itself. It is thus broader than "subscribed capital stock."
The terms "subscribed capital stock" and "issued" or "outstanding"
capital stock are used synonymously since subscribed capital
stock, as distinguished from the certificate of stock, can be issued
even if not fully paid. But while every subscribed share (assuming
there is a binding subscription agreement) is "outstanding," an
issued share may not have the status of outstanding shares.
(d) PAID-UP CAPITAL STOCK is that portion of the subscribed or
outstanding capital stock that is actually paid.
The term actual capital stock is also used to refer to the amount
of the capital stock actually subscribed and paid for.
(e) UNISSUED CAPITAL STOCK is that portion of the capital stock
that is not issued or subscribed. It does not vote and draws no
dividends.
(f) LEGAL CAPITAL is the amount equal to the aggregate par value
and/or issued value of the outstanding capital stock. When par
value shares are issued above par, the premium or excess is not
to be considered as part of the legal capital, (see Sec. 43.) Under
CORPORATION | ATTY. BUSMENTE | DE LEON
varying State laws, the term "stated capital" is used instead of legal
capital to refer to "the portion of the amount contributed by
purchasers of no par value stock that is credited to the capital
account."
ILLUSTRATION:
Suppose the articles of incorporation of corporation X provides that the
authorized capital stock of said corporation is P1,000,000.00 divided into
10,000 shares of the par value of P100.00 per share. At its incorporation, only
P250,000.00 of the authorized capital stock was subscribed.
Under Section 13, at least 25% of the subscription is required to be paid; thus,
only P62,500.00 was paid to the treasurer of the corporation.
Therefore, the authorized capital stock of corporation X is P1,000,000.00, the
subscribed, outstanding, or issued capital stock is P250,000.00, the paid-up
capital stock is P62,500.00, and the unissued capital stock is P750,000.00. The
legal capital is also P250,000.00.
(2) CAPITAL is used broadly to indicate the entire property or assets of
the corporation. It includes the amount invested by the stockholders
plus the undistributed earnings less losses and expenses. It includes
all balances or installments due the corporation for shares of stock
sold by it and all unpaid subscription for shares.
In the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account.
CAPITAL STOCK AND CAPITAL DISTINGUISHED.
CAPITAL CAPITAL STOCK
It is the actual corporate property. It is Capital stock is an amount. It is,
therefore, a concrete thing. therefore, something abstract
Capital fluctuates or varies from day to
day according as there are profits or Capital stock is an amount fixed in the
losses or appreciation or depreciation of articles of incorporation (where shares
corporate assets. Thus, capital may be are with par value) and is unaffected by
greater or lesser than the amount of the profits and losses
capital stock.
capital stock when issued belongs to
capital belongs to the corporation
the stockholders
capital may be either real or personal
capital stock is always personal.
property
CRSC | 15
CAPITAL STOCK AND LEGAL CAPITAL DISTINGUISHED.
CAPITAL STOCK LEGAL CAPITAL
CAPITAL STOCK AND SHARE OF STOCK DISTINGUISHED.
legal capital is merely an amount and CAPITAL STOCK SHARE OF STOCK
remains unchanged except as
(same) outstanding shares are increased or
reduced in number or amount.
the term "stock" or "share of stock"
It is used in a collective sense to is commonly used in a distributive
signify the whole body of shares of sense to refer to the stock in the
legal capital sets the nurtimum amount stock in the corporation. hands of the stockholders and,
capital stock limits the maximum therefore, belongs to them.
of the corporate assets which for the
amount or number of shares that may
protection of corporate creditors, may
be issued without formal amendment of
not be lawfully distributed to
the articles of incorporation
stockholders.
NATURE OF SHARE OF STOCK.
1. Each share merely represents a distinct undivided share or interest in
ILLUSTRATION: the common property of the corporation.
In the previous illustration, the payment of the subscription of 2,500 shares in the
Such interest has been described as "indirect, contingent, remote,
amount of P250,000.00 whether in cash or property or any consideration allowed by
law (see Sec. 62.) constitutes the original capital of corporation X.
conjectural, consequential, and collateral. It is purely inchoate, or a
mere expectancy of a right in the management of the corporation and
If the corporation makes a profit of P50,000.00, the capital would become P300,000.00. to share in the profits thereof and in the properties and assets thereof
On the other hand, the capital would be reduced to P200,000.00 if there is a loss of on dissolution, after payment of corporate debts and obligations."
P50,000.00. Suppose the corporation borrows P150,000.00 from a bank. The capital Hence, stockholders of such are not entitled to intervene in a litigation
of the corporation would then be P450,000.00 or P350,000.00, according as there are involving corporate property under Section 2, Rule 12 of the Rules of
profits or losses. Court.
In any case, the capital stock of P1,000,000.00 and the legal capital of P250,000.00
2. Shares of stock constitute property distinct from the capital or tangible
remain constant unless, of course, the articles of incorporation is amended, either
increasing or decreasing the capital stock, or the number or amount of outstanding property of the corporation and belong to the different owners.
shares is increased by the issuance of more shares out of the unissued authorized
shares or decreased by the acquisition of previously issued shares, (see Sees. 9, 41.) 3. They are in the nature of choses in action but are not such in a strict
A decrease of the capital stock may also result in the reduction of legal capital, (see sense.
Sec. 38.)
4. A share of stock only typifies a proportionate or aliquot part of the
corporation's property, or the right to share in its proceeds to that
STOCK OR SHARE OF STOCK DEFINED. extent when distributed according to law. It does not represent
- is one of the units into which the capital stock is divided. property of a corporation.
- It represents the interest or right which the owner has:
(1) in the management of the corporation in which he takes part
through his right to vote that class of stock by the articles of CERTIFICATE OF STOCK DEFINED.
incorporation; - Certificate of stock is a written acknowledgment by the corporation of
(2) in a portion of the corporate earnings, if and when segregated in the interest, right, and participation of a person in the management,
the form of dividends; and profits, and assets of a corporation.
(3) upon its dissolution and winding up, in the property and assets of - It is a formal written evidence of the holder's ownership of one or more
the corporation remaining after the payment of corporate debts and shares and is a convenient instrument for the transfer of title,
liabilities to creditors.

CORPORATION | ATTY. BUSMENTE | DE LEON CRSC | 16

SHARE OF STOCK AND CERTIFICATE OF STOCK DISTINGUISHED.
SHARE OF STOCK CERTIFICATE OF STOCK
incorporeal or intangible property. tangible
represents the right or interest of a
Written evidence of that right or interest
person in a corporation
As a general rule, a certificate of stock
may be issued even if the subscription
may not be issued unless the
is not fully paid except in no par shares
subscription is fully paid
situs of share of stock is deemed to be certificate of stock may have a situs at
the State where the corporation has its the place where it is located or at the
domicile which is ordinarily the State domicile of the owner, even though the
under whose laws it was created corporation is domiciled elsewhere.
Note: The situs of share of stock retains that of the issuing corporation, even
though the certificate is without the State and is owned by a nonresident.
SITUS OF SHARES OF STOCK FOR CERTAIN PURPOSES.
(1) For purposes of execution, attachment, and garnishment. — The
situs of shares of stock is the domicile or residence of the corporation
which is the place where the principal office of the corporation is
located,
(2) For purposes of registration of chattel mortgages on shares of
stock. — The situs is the province or city in which the corporation has
its principal office or place of business.
(3) For purposes of property taxation.— The general rule is that the
situs of intangible property is at the domicile or residence of the owner.
(a) The above principle, however, is not controlling when it is
inconsistent with express provisions of statute, or when justice
does not demand that it should be, as where the property has in
fact a situs elsewhere,
(b) Under the National Internal Revenue Code (Pres. Decree No.
1158, as amended.), for purposes of the estate tax, the gross
estate of a resident decedent, whether citizen or alien, or a citizen
decedent, whether resident or nonresident, includes his intangible
personal property wherever situated.
CORPORATION | ATTY. BUSMENTE | DE LEON
CLASSES OF SHARES IN GENERAL.
Shares of stock may be:
1. Par value or no par value;
2. Voting or non-voting;
3. Common or preferred, and preferred shares may be voting,
convertible, or redeemable, (infra.)
They may be: a. Preferred as to assets in case of liquidation or
preferred as to dividends and the latter, in turn, may be either:
1) Cumulative or non-cumulative; or
2) Participating or non-participating;
4. Promotion share;
5. Shares in escrow;
6. Convertible share;
7. Founders' share;
8. Redeemable share
9. Treasury Share
PAR VALUE SHARE.
- is one with a specific money value fixed in the articles of
incorporation and appearing in the certificate of stock.
- The primary purpose of par value is to fix the minimum subscription or
issue price of the shares, thus assuring creditors that the corporation
would receive a minimum amount for its stock.
- A corporation may issue shares with different par values. Shares
issued less than par value are referred to as watered stock.
- The par value of a stock remains the same regardless of market value
or book value (infra.) of the stock, except when there is a stock split,
(see annotation under Sec. 43.) It is not usually the price at which
investors buy or sell the stock.
NO PAR VALUE SHARE.
- is one without any stated value appearing on the face of the
certificate of stock. In other words, it is a stock which does not state
how much money it represents.
- A no par value share has, therefore, no par value but it has always an
"issued value," i.e., the consideration fixed by the corporation for its
issuance,
- A no par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only
an aliquot part of the whole number of such shares of the issuing
corporation.
- No par value stockholders have the same rights as holders of par
value stock.
(1) The capital stock of a corporation issuing only no par shares is not set
forth by a stated amount of money, but instead is expressed to be
divided into a stated number of shares, such as 1,000 shares. This
CRSC | 17
 indicates that a shareholder of 100 shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10.
VOTING SHARE.
- share with right to vote.
- It is generally customary to give the right to vote to the common stock
and to withhold it from the preferred. Each common share shall be
equal in all respects to every other common share.
Corporations are hereby prohibited from issuing multiple voting
and non-voting common shares nor can they limit the maximum
number of votes per stockholder irrespective of the number of
shares he holds.
- Only shares classified and issued as "preferred" or "redeemable" may
be deprived of voting rights.
- Article 6 (par. 1.) expressly prohibits the depreciation of voting rights
except only as to said shares. But founders' shares may be given the
exclusive right to vote and be voted for in the election of directors for
a limited period (Sec. 7.) in which case voting common stocks will have
no right to vote for directors.
- Under the Code, whenever a vote is necessary to approve a particular
corporate act, such vote refers only to stocks with voting rights
except in certain cases when even non-voting shares may also vote.
(Sec. 6, par. 6 and last par.) The rule is not "one stockholder, one
vote" but "one share, one vote" because representation in a
corporation is commensurate to extent of ownership.
NON-VOTING SHARE.
- is share without right to vote.
- Under the Code, no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in the Code. (Sec. 6, par. 1.)
COMMON SHARE.
- is one which entitles the holder thereof to a pro rata division of the
profits, if there are any, and in its assets upon dissolution, without any
preference or advantage in that respect over other stockholders or
class of stockholders but equally with all other stockholders except
preferred stock- holders.
- Common shares have complete voting rights. They cannot be
deprived of said rights except as provided by law.
- Common stockholders are the residual owners of the corporation.
They get only the assets left over in case of liquidation after all
other securities holders are paid.
CORPORATION | ATTY. BUSMENTE | DE LEON
- As a result of restrictions upon other classes of stock with respect to
voting rights, the common stock, normally, as to those classes,
has preference in the matter of management
PREFERRED SHARE.
- is one with a stated par value which entitles the holder thereof to
certain preferences over the holders of common stock.
- Note: More than one class of preferred shares may be issued usually
designated "first preferred," "second preferred," etc.
- The term guaranteed stock is sometimes used as synonymous with
preferred stock on which the payment of dividend is guaranteed and a
distinction is sometimes drawn to the effect that guaranteed stock is
entitled to arrears in dividends, while ordinary preferred stock is not.
- Interest bearing stock on which the corporation agrees absolutely to
pay interest before dividends are paid to common stockholders is legal
only when construed as requiring payment of interest as dividends
from net earnings or surplus only. (see Sec. 43.) Such stock is, in
effect, preferred stock, except perhaps that the discretion of board of
directors to use profits for other corporate purposes may be more
limited.
PROMOTION SHARES.
- Such shares as are issued to promoters, or those in some way
interested in the company, for incorporating the company, or for
services rendered in launching or promoting the welfare of the
company, such as advancing the fees for incorporating, advertising,
attorney's fees, surveying, etc.
SHARE IN ESCROW.
- share subject to an agreement by virtue of which the share is
deposited by the grantor or his agent with a third person to be
kept by the depository until the performance of a certain
condition (usually the payment of the full subscription price) or the
happening of a certain event contained in the agreement.
- The escrow deposit makes the depository a trustee under an express
trust, (see Arts. 1440,1441, Civil Code.)
- The legal title to the subject matter to be conveyed remains in the
grantor until the condition is fulfilled. The issuance of the shares is thus
made subject to a suspensive condition.
CONVERTIBLE SHARE.
- share which is convertible or changeable by the stockholder from one
class to another class (such as from preferred to common) at a certain
price and within a certain period.
- Except as may be restricted by the articles of incorporation, the
stockholder may demand conversion at his pleasure. The conversion
CRSC | 18
 ratio is the price at which the common is to be valued as against the
preferred
- Where the corporation has previously issued stock to the entire
authorized limit, it cannot, of course, issue additional stocks if the
authorized common stock of the corporation is fully subscribed.
CONVERTIBILITY OF SHARES.
PREFERRED SHARES INTO COMMON.
- In the absence of an express provision in the articles of incorporation
as to their convertibility feature, preferred shares cannot be converted
into common. The terms of the preferred share contract cannot be
changed without the consent of the stockholders. (Sec. 6, par. 1; SEC
Opinion, May 19, 1992.)
NO PAR VALUE SHARE TO PAR VALUE.
- The conversion of no par value shares to par value is allowed by
SEC provided there would be no change in the stockholders'
percentage interest in the total assets of the corporation.
NATURE OF PAR VALUE/ BOOK VALUE/ MARKET VALUE.
(1) Par value. — The par value indicated in the certificate of stock
represents the amount of money or property contributed by the
shareholder to the capital stock of the corporation.
a. Patently, the assets of a company cannot always be equal to
the par value of the outstanding stock, the assets being
constantly in a state of fluctuation as the business prospers or
declines.
(2) Book value. — Hence, the par value does not always reflect its book
value or its actual or true value which may be determined by dividing
the total stockholders' equity or the net value of the total corporate
assets (capital and surplus, if any) by the number of shares issued or
outstanding. Since unpaid subscriptions are considered part of the
asset of a corporation which the board of directors may at any time
declare due and payable they should be included in the computation
of book value.
a. But book value does not attach to unissued or reacquired
shares.
(3) Market value. — Par value and book value may be more or less than
market value which may be defined as the price at which a willing
seller would sell and a willing buyer would buy, assuming that both
have a reasonable knowledge of the facts, and neither being under
abnormal pressure.
a. Market value is affected by the law of supply and demand.
CORPORATION | ATTY. BUSMENTE | DE LEON
ILLUSTRATION:
Suppose that X Corporation has an authorized capital stock of P1M divided
into 10,000 shares with a par value of PI00.00 per share. The capital stock is
fully subscribed and paid up in cash. At this stage, the par value is the same
as its actual or book value. The book value is determined by dividing
P1,000,000.00, the net asset, by 10,000, the number of shares issued or
outstanding.
If the corporation makes a net profit of P100,000.00, the increased book value
of each share would be P110.00. On the other hand, if the corporation suffers
instead a loss of P100,000.00, its net assets would then be reduced to
P900,000.00, thereby making the book value of each share at only P90.00.
The market value, however, of each share may not be P100.00 or P110.00 or
P90.00. Thus, the market value of each share of X Corporation may be
PI50.00 when the book value is P110.00 or it may be P60.00 when the book
value is P90.00. The market value of stocks may be influenced by the present
and prospective net income of the corporation, attractive dividend payments,
and other factors.
PRESUMPTION AS TO VALUE OF CORPORATE STOCK.
- Corporate stock is "at par" when it is worth its face value, and
- is "above par" or at a "premium" when it is worth more.
- According to some authority, no presumption exists, in the absence of
supporting evidence, that corporate stock is worth its par or face value.
There is another authority, however, that in the absence of contrary
evidence, there is a presumption that corporate stock is worth its par
or face value.
Note: It is difficult to determine the book or market value or price of a
corporation's stock when it is not traded publicly.
STATUTORY RESTRICTIONS REGARDING THE ISSUANCE OF NO PAR
VALUE SHARES.
(1) Banks, trust companies, insurance companies, and building and loan
associations shall not be permitted to issue no par value shares of stock;
(2) Preferred shares of stock of any corporation may be issued only with a
stated par value
(3) Shares issued without par value shall be deemed fully paid and non-
assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto.
(4) Shares without par value may not be issued for a consideration less than
the value of five pesos per share (Sec. 5, par. 3.); and
(5) The entire consideration received by the corporation for its no par value
shares shall be treated as capital, and, therefore, shall not be available
for distribution as dividends.
CRSC | 19
CONSIDERATION FOR NO PAR VALUE SHARES.
Since the value of corporate stocks fluctuates and rarely represents the par
value, corporations are authorized to issue no par value shares.
(1) A no par value share has no "par value" but it has always an "issued
value" based on the consideration for which it is issued. Under Section
6, a no par value share may not be issued for less than P5.00 per
share.
(2) While all the par value stocks must be issued at a uniform value or
price, no par value stocks may be issued from time to time at different
prices or values although the holders of all these shares are entitled
to share equally in the distribution of the profits and assets of the
corporation, (see Sec. 62, last par.)
ADVANTAGES OF PAR VALUE SHARES.
(1) Par value shares are easily sold as the public is more attracted to buy
this kind of shares;
(2) There is greater protection to creditors;
(3) There is unlikelihood of sale of subsequently issued shares at a lower
price;
(4) There is unlikelihood of the distribution of dividends that are only
ostensible profits,
DISADVANTAGES OF PAR VALUE SHARES.
(1) The subscribers are liable to corporate creditors for their unpaid
subscription;
(2) The stated face value of the share is not an accurate criterion of its
true value.
ADVANTAGES OF NO PAR VALUE SHARES.
(1) No par value shares are issued as fully paid and non- assessable;
(2) Their price is flexible
(3) Low-priced stocks (most no par shares are low-priced) enjoy wider
distribution;
(4) They tell no untruth concerning the value of the stock- holder's
contribution; and
(5) Stock dividends are more easily issued, thereby simplifying
accounting procedure.
DISADVANTAGES OF NO PAR VALUE SHARES.
(1) They legalize large issues of stock for property;
(2) They conceal the money or property represented by the shares;
(3) They promote issuance of watered stock;
(4) There is lesser protection to creditors.
CORPORATION | ATTY. BUSMENTE | DE LEON
KINDS OF PREFERRED SHARES.
(1) PREFERRED SHARE AS TO ASSETS or share which gives the
holder thereof preference in the distribution of the assets of the
corporation in case of liquidation. (Sec. 6, par. 2.)
(2) PREFERRED SHARE AS TO DIVIDENDS or share the holder of
which is entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the holders of
common stock.
- There is no guaranty, however, that it will receive any dividends. The
corporation is not bound to pay dividends unless the board of directors
declare them.
- The preference simply means that holders of common stock may
receive dividends only after the satisfaction of the prior claims on
dividends of preferred stockholders.
PREFERENCE AMONG PREFERRED SHARES.
- A corporation may issue more than one class of preferred stock as to
assets or as to dividends. Thus, certain preferred shares may be given
first preference or second preference on earnings. Unless a
classification is provided in the articles of incorporation, the rule is that
preferred shares of stock enjoy the same preferences or privileges.
PREFERRED STOCKHOLDERS NOT CREDITORS OF CORPORATION.
- Preferred shares of stock issued by a corporation may be given such
other preferences as may be stated in the articles of incorporation
which are not violative of the provisions of the Code.
(1) Lien upon corporate property. — Preferences granted to
preferred stockholders do not give them a lien upon the property
of the corporation nor make them creditors of the corporation, the
rights of the former being always subordinate to the latter.
(2) Stock issued with a fixed interest. — Stock cannot be issued
with a fixed interest instead of dividends inasmuch as this will
make the contract of subscription one of loan and make the
corporation a debtor of the subscriber. Shareholders, both
common and preferred, are risk takers who invest capital in the
business and who can look only to what is left after corporate
debts and liabilities are fully paid. They sink or swim with the
corporation and there is no obligation to return the value of their
snares by means of repurchase if the corporation incurs losses
and financial reverses, much less guarantee such repurchase
through a surety bond.
CRSC | 20
 (3) Stock issued with dividends payable in the nature of interest.
— However, the dividends payable by the corporation may be in
the nature of interest as where the parties, under an agreement,
intended the repurchase by the corporation of preferred shares
with agreed cumulative dividends of a fixed percentage per
annum, on their respective scheduled dates to be an absolute or
unconditional obligation which does not depend upon the
financial ability of the corporation, especially so where the
obligation is secured by a surety, notwithstanding that the
dividends are supposed to be paid out of net profits and earned
surplus.
(4) Stock issued with dividends payable guaranteed. — The fact
that dividends are, in terms, guaranteed, does not make them
creditors. They are entitled to dividends only when there are
profits out of which dividends may be declared. Such a guarantee
may, however, have the possible effect of making the dividends
cumulative, that is, making the profits of one year make up for the
deficiencies of the preceding year or years.
(5) Stock issued to creditors. — It is immaterial how or where the
holder obtained his stock since the preference belongs to the
stock and not to the stockholder. Hence, the fact that preferred
stockholders were formerly corporate creditors gives them no
greater right as against creditors. By abandoning their position as
creditors, they lose their rights as such.
LIMITATIONS REGARDING ISSUANCE OF PREFERRED SHARES.
(1) Preferred shares deprived of voting rights in the articles of incorporation
(Sec. 6, par. 1.) shall still be entitled to vote on matters enumerated in
Section 6 (par. 6.), although they shall not be entitled to vote on other
matters (last par.)
(2) The preferences of preferred shares must not be violative of the
provisions of the Code;
(3) Preferred shares may be issued only with a stated par value; and
(4) The board of directors may fix the terms and conditions of preferred
shares of stock or any series thereof only when so authorized by the
articles of incorporation and such terms and conditions shall be effective
upon filing a certificate thereof with the Securities and Exchange
Commission.
CORPORATION | ATTY. BUSMENTE | DE LEON
AUTHORITY OF BOARD OF DIRECTORS TO FIX TERMS AND
CONDITIONS OF PREFERRED SHARES.
(1) Benefits from authority given. — The authority enables the board,
without the delay and expense of amendment of the articles of
incorporation, to "tailor its securities to meet changes in market conditions
which cannot be foreseen at the time of incorporation or later amendment
of the articles of incorporation. Typical of the changes is the variance of
the dividend rate to meet the demands of the money market.
- The resolution of the directors fixing such preferences is generally
required to be certified and filed or recorded in the same manner as
articles of incorporation, thus, providing certain information as to the
terms of the contract."
(2) Concurrence of stockholders not required. — It would not need the
concurrence of two-thirds (2/3) of the outstanding capital under Section
16 for the board to fix the terms and conditions of the preferred shares
where authorized by the articles of incorporation; otherwise, it would
defeat the very purpose for which the authority was granted, which is to
allow the corporation to respond quickly to the fluctuating conditions in the
market.
(3) Blanket authority not contemplated. — It would be contrary to Section
6 of the Code to give the board of directors blanket authority to fix the
terms and conditions of the preferred shares without stating the privileges,
preferences, restrictions, or rights of the preferred shares. Unless certain
features, guidelines and standards as to the issue of preferred shares are
stated or spelled out in the articles of incorporation, such authorization
becomes a dangerous power which may adversely affect the rights of
shares already issued.
KINDS OF PREFERRED SHARES AS TO DIVIDENDS.
(1) Cumulative preferred share is share which entitles the holder thereof
not only to the payment of current dividends but also to dividends in
arrears. In other words, if the stipulated dividend is not paid in a given
year, it shall be added to the dividend which shall be due the following
year and the accumulated dividends must be paid to the holder of said
preferred share before any dividend may be paid to the holders of
common stock.
(2) Non-cumulative preferred share is share which entitles the holder
thereof to the payment of current dividends only in preference to common
stockholders. In other words, if dividends are not declared in a given year,
the right to the dividends for that particular year is extinguished.
(3) Participating preferred share is share which gives the holder thereof not
only the right to receive the stipulated dividends at the preferred rate but
CRSC | 21
 also to participate with the holders of common shares in the remaining
profits pro rata (or in the proportion stated in the articles of incorporation)
after the common shares have been paid the amount of the stipulated
dividend at the same preferred rate.
(4) Non-participating preferred share is share which entitles the holder
thereof to receive the stipulated preferred dividends and no more. The
balance, if any, is given entirely to the common stocks.
In the absence of an agreement, express or implied, dividends should be
deemed noncumulative and non-participating in accordance with the
presumption established in Section 6 (par. 5.) that shares are equal in all
respects unless otherwise stated in the articles of incorporation and in the
certificate of stock.
(5) Cumulative-participating preferred share is share which is a
combination of the cumulative share and participating share. This means
that the holder is entitled not only to dividends in arrears but also, after
receiving his preferred share of dividends, to participation with the holders
of common stock in the remaining profits.
SECTION 7
Founders 'shares.- Founders’ shares classified as such in the articles of
incorporation may be given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. Period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission, (n)
Founders' shares
- "shares issued to the organizers and promoters of a corporation in
consideration of some supposed right or property.
- Such shares usually share in profits only after a certain percentage
has been paid upon the common stock, but are often given special
privileges over other stock as to voting and as to division of profits in
excess of a minimum dividend on the common stock.
(1) Special rights and privileges. — The shares of stock of a
corporation, close or non-close (see Title XII.), may include founders'
shares classified as such in the articles of incorporation. Such shares
CORPORATION | ATTY. BUSMENTE | DE LEON
may be given special rights and privileges not enjoyed by the owners
of other stock including common stocks, such as preference in the
payment of dividends and/or distribution of assets in case of
liquidation, right to convert the shares into other shares, right to
cumulative dividends, etc. to encourage them to make large
investments in the proposed corporation.
(2) Exclusive right to vote and be voted. — Where, however, the
exclusive right to vote and be voted for in the election of directors is
granted, such right must be for a limited period not exceeding five (5)
years subject to approval of the SEC, the period to commence from
the date of said approval,
(a) The five-year period limitation and Commission approval
requirement are designed to protect the interests of the other
stockholders against possible abuse by a minority holding
founders' shares granted the exclusive right to vote and be voted
for in the election of directors, to hold office for an unlimited term.
The limitation is non-extendible. Commission may approve or
reject the grant of the exclusive right having in mind as well the
protection of the interests of the corporation itself
(b) Section 7 provides an exception to the rule in Section 6 (par. 1.)
that "no share may be deprived of voting rights except those
classified and issued as 'preferred' or 'redeemable shares/ unless
otherwise provided in this Code."
(c) The limitation in Section 7 refers only to the exclusive right to vote
and be voted for in the election of directors, a right normally
enjoyed by holders of common shares, the class of shares which
are supposed to have complete voting rights. After the expiration
of the limitation period, founders shall have equal rights with the
holders of common shares. Preferred shares are not affected by
the provisions in Section 7. Their status remains even after the
expiration of the five-year period.
SECTION 8
Redeemable Shares.- Redeemable shares may be issued by the corporation
when expressly so provided in the articles of incorporation. They may be
purchased or taken up by the corporation upon the expiration of a fixed period,
regardless of the existence of unrestricted retained earnings in the books of
the corporation, and upon such other terms and conditions stated in the articles
of incor- poration, which terms and conditions must also be stated in the
certificate of stock representing said shares, (n)
CRSC | 22
REDEEMABLE SHARES.
Redeemable or callable shares are shares, usually preferred, which by their
terms are redeemable at a fixed date or at the option of either the issuing
corporation or the stockholder or both at a certain redemption price.
(1) Meaning of redemption. — It is the repurchase, the reacquisition of
stock by a corporation which issued the stock in exchange for cash or
property, whether or not the acquired stock is cancelled, retired or held
in the treasury.
(2) When redeemable shares may be issued. — Under Section 8, they
refer to shares issued by a corporation which said corporation may
purchase or take up from their holders upon the expiration of a fixed
period and upon such terms and conditions expressly provided in its
articles of incorporation and certificates of stock representing said
shares. They may be issued only when expressly so provided in the
articles of incorporation. Common shares are never "redeemed."
(3) Redemption regardless of existence of unrestricted retained
earnings. — Upon the expiration of the period fixed, they may be
taken up or purchased by the corporation, regardless of the existence
of unrestricted retained earnings (see Sec. 43.) in the books of the
corporation.
(4) Where corporation insolvent. — Redeemable shares may be
redeemed regardless of the existence of unrestricted retained
earnings, provided that the corporation has, after such redemption,
assets in its books to cover debts and liabilities inclusive of capital
stock. Therefore, redemption may not be made where the corporation
is insolvent or if such redemption would cause insolvency or inability
of the corporation to meet its debts as they mature.
(5) Terms and conditions. — Provisions in the articles relating to the
redemption of preferred stock are, in effect, a contract between the
issuing corporation and the preferred stockholders and strict
compliance thereof is essential. Thus, the corporation cannot redeem
its preferred shares before the redemption period or at a discount price
in contravention of the articles of incorporation to improve its financial
position. The remedy is to amend the articles by changing the
redemption features of the preferred shares.
(6) Redemption optional with corporation. — Except as other- wise
provided therein, the redemption rests entirely with the corporation,
and the stockholder is without right to either compel or refuse the
redemption of his stock,
CORPORATION | ATTY. BUSMENTE | DE LEON
(7) Maintenance of a sinking fund. — For the protection of stockholders,
all corporations which have issued redeemable shares with mandatory
redemption features are required by the SEC to set up and maintain a
sinking fund where cash is gradually set aside in order to accumulate
the amount necessary to meet the redemption price of redeemable
shares at specified dates in the future.
(8) Purpose of redemption. — Redemption is not a preference for the
benefit of the shareholders but a restriction to be exercised in the
discretion of the board of directors for the benefit of the owners of the
corporation, holders of common shares. It is a safe- guard to enable a
corporation to retire an obligation or a claim on the earnings, usually
at a premium when it becomes advisable for purposes of financing.
(Ballantine, p. 509 [1946 ed.].) It is generally held that a corporation
may redeem its preferred stock only when it is expressly authorized
by law or has contractually reserved the right to do so, and that it has
no inherent power in this respect. (Bowman vs. Armour & Co., 17 111.
2d 43.)
In the light of the foregoing, unless expressly provided in the articles
of incorporation and stated in the certificate of stock, preferred shares
shall be deemed irredeemable,
(9) Effect of redemption. — A redemption by the corporation of its stock
is, in a sense, a repurchase of it for cancellation. The retirement of a
class of stock destroys all rights adhering to the shares of that class.
(a) In the case of redeemable shares reacquired by the corporation,
the same shall be considered retired and no longer issuable,
unless otherwise provided in its articles of incorporation, The rule
is different with respect to treasury shares
(b) Upon redemption, redeemable shares lose their status as part of
the outstanding or unissued authorized capital stock. They are
considered treasury shares after redemption if by provision of the
articles of incorporation they can be reissued.
(c) Where the reissuance of redeemed shares is prohibited, either
expressly or impliedly by silence, the number of authorized
shares of the capital stock of the corporation is reduced
accordingly, and the articles of incorporation must be amended
to reflect such reduction, (see Sec. 16.)
(10)Voting rights. — Redeemable shares may be deprived of voting
rights in the articles of incorporation, unless otherwise provided in the
Code.
CRSC | 23
 capital stock and their sale does not increase the number of
SECTION 9 issued shares or the amount of stated capital.

2. Where acquisition from stockholders. — Shares may be acquired

Treasury shares. — Treasury shares are shares of stock which have been
by the corporation from stockholders by purchase, redemption, or
issued and fully paid for, but subsequently reacquired by the issuing donation, or through some other lawful means.
corporation by purchase, redemption, donation, or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by (a) If the corporation acquires the shares by purchase from
the board of directors, (n) stockholders, the transaction is, in effect, a return to them of the
value of their investments in the company, and a reversion of the
shares to the corporation. It is required in such cases, however,
that the corporation must have surplus with which to buy the
TREASURY SHARES.
shares so that the transaction will not cause an impairment of its
- shares which have been lawfully issued by the corporation and fully
capital.
paid for and later reacquired by it either by purchase, redemption (Sec.
(b) On the other hand, if the shares are donated to the corporation
8.), donation, forfeiture or other lawful means.
by the stockholders, their act would simply amount to the
surrender of their stock without getting back their investments
1. Status.—Section 41 expressly empowers a stock corporation to
which are, instead, voluntarily given to the corporation.
purchase or acquire its own shares for legitimate corporate purposes.
Only surplus earnings may be used for the purchase of treasury
In both kinds of acquisition of the corporation, therefore, the shares would
shares. Under Section 68 (last par.), the corporation, in the absence
have value but inasmuch as they have been acquired by the corporation,
of a qualified bidder, may bid at the public sale of delinquent shares
they would cease to represent any right. Treasury shares are recorded at
and title to the shares purchased shall be vested in the corporation as
cost.
treasury shares. The purchase by the corporation operates, in effect,
as a forfeiture of the shares.
3. Dividend restriction on retained earnings. — As a general rule, a
corporation can reacquire its own shares provided it has an adequate
(a) Treasury shares are not retired shares. They do not revert to the
amount of unrestricted retained earnings to support the cost of the said
unissued shares of the corporation but are regarded as property
shares. Thus, the capital stock is preserved.
acquired by the corporation which may be reissued or resold by
the corporation at a price to be fixed by the board of directors.
4. Declaration as property dividend. — Treasury shares being
Retirement of treasury shares can be effected by decreasing the
unrealized income, are not considered as part of earned or surplus
capital stock of the corporation in accordance with Section 38 for
profits, and, therefore, not distributable as dividends, either in cash or
the purpose of eliminating the treasury shares.
stock. But if there are retained earnings arising from the business of
(b) Treasury shares are issued shares but being in the treasury
the corporation, treasury shares, being the property of the corporation,
(hence, the name), they do not have the status of outstanding
may properly be distributed as property dividend.
shares, in the sense that they do not constitute a liability of the
corporation. Since they do not lose their status as issued shares,
The Securities and Exchange Commission requires that an amount of
they cannot be treated as new issues when disposed of or
the retained earnings equivalent to the cost of treasury shares be
reissued.
restricted from being declared as dividends, until said shares are
(c) A treasury share or stock, which may be common or preferred,
reissued or retired.
may be used for a variety of corporate purposes, such as for a
stock bonus plan for management and employees, or for
5. Voting rights. — Treasury shares have no voting rights as long as
acquiring another company
they remain in the treasury (Sec. 57.), i.e., uncancelled and subject to
(d) Treasury shares must be distinguished from the authorized
reissue. A corporation cannot in any proper sense be a stockholder in
but unissued shares in that the acquisition of the former does not
itself, and shares of its own stock, therefore, held by it cannot be voted
reduce the number of issued shares or the amount of stated
or be entitled to vote, for otherwise, equal distribution of voting powers
CORPORATION | ATTY. BUSMENTE | DE LEON CRSC | 24
 among stockholders will be effectively lost and the directors will be
able to perpetuate their control of the corporation.

(5) Right to dividends. — Neither are treasury shares entitled to dividends

or assets because dividends cannot be declared by a corporation to itself.
(Ibid.) Such distribution of dividends would be like making the corporation
debtor and creditor of the same amount at the same time or requiring it to
take money or stock from one of its pockets and putting the same in
another, which would be pointless.

(6) Resale. — They may be sold by the corporation at any price the board of
directors sees fit to accept, even at less than par or issued value, the
corporation having already received the full value upon their initial
issuance, provided such price is reasonable under the circumstances:
(a) Stockholders may rightfully complain if the price is lower than
reasonable.
(b) In case of sale or reissue, the treasury shares again becomes
outstanding stock and regain whatever dividends and voting rights
they originally held.
(c) Treasury shares differ from retired or cancelled shares in that while
the latter has disappeared altogether, the former may be sold.
Section 36(6) expressly authorizes stock corporations to sell treasury
shares subject to the provisions of Section 9. Their status on resale
differs from that of newly created shares which cannot be issued for
less than the legal minimum consideration, (see Sec. 62.)
(d) The sale of treasury shares should be treated as a sale of ordinary
property of the corporation; hence, the gain therefrom is subject to
tax. The purpose of the sale is to recover the amount paid by the
corporation for said shares.

CORPORATION | ATTY. BUSMENTE | DE LEON CRSC | 25